Friday, August 16, 2013

The Affirmative Case for Significant Income and Wealth Redistribution

-- Posted by Neil H. Buchanan

Every year, I write a column for Jotwell: The Journal of Things We Like (Lots), an online journal that began publication in late 2009. Writers on Jotwell are assigned to write short-ish columns ("jots") describing the most important article/book/whatever in the writer's field of expertise that s/he has read in the past year (not including classics). My Dorf on Law posts linking to my three previous jots can be found here, here, and here. This year's jot was published last Friday.

In that column, I discuss an article by the public finance economists Peter Diamond and Emmanuel Saez, The Case for a Progressive Tax: From Basic Research to Policy Recommendations, which they published a bit less than two years ago in the Journal of Economic Perspectives. That journal is published by the American Economic Association, which created it in the 1980's as part of a reaction against the absurd arms race in the use of mathematics in the mainstream economics journals. The JEP is thus one of the few (if not the only) places where one can find A-list economists speaking English, forced to communicate with a broader audience in a useful way. (Not that Diamond and Saez are among the worst offenders in that regard. They are merely denizens of the strange nerd-boy hothouse that economics has become within the past few generations.)

Along with Thomas Pikketty and some other co-authors, Diamond and Saez have spent the last several years looking seriously at the evidence regarding the effects of redistributive fiscal policy on economic outcomes. The article that I reviewed in my jot summarizes their findings. As I explain, their research has led them to three conclusions: (1) High incomes should be taxed much more steeply than the US currently taxes them, (2) Low incomes should be subsidized, and what counts as "low" income for this purpose should be increased, and (3) Capital income should be taxed.

It might be obvious to a non-economist that points 1 and 2 are powerful, but I suspect that the third point is more obscure. In part, this is because Diamond and Saez are responding to a conventional wisdom among orthodox economists that the rest of the world -- thankfully -- still finds controversial (at best). Standard, utility-maximization-based economic models have long been used to justify the claim that only labor income (wages and salaries) should be taxed, whereas capital income (profits, dividends, capital gains, and so on) should not be taxed AT ALL. There are a lot of cute theoretical moves that are necessary to reach that conclusion, but this extreme form of trickle-down has been the conventional wisdom among "the best economists" for quite some time.

The point that I stress in my jot is that legal scholars have unfortunately accepted uncritically this conventional wisdom among economists, making the Diamond/Saez paper especially important for tax law professors. Beyond that cross-disciplinary translation problem, however, the larger point is that the whole line of work that Diamond and Saez summarize has completely blown the conventional wisdom out of the water. Economics has long been viewed, for very good reason, as a field that uses smoke and mirrors (basically, making assumptions that lock in the conclusions, and then dressing it up in obscure language and technical arcana) to "prove" that regressive economic policies are for everyone's own good, and that efforts to redistribute downward are mere feel-good exercises that harm everyone, including the people they are intended to benefit.

Some economists have fought back against this idea all along. Alan Blinder, a highly-regarded Princeton economist (and former Fed co-chair), wrote a book in the 1980's called "Hard Heads, Soft Hearts: Tough-minded Economics For A Just Society," the title of which shows just how defensive liberal economists are about proposing progressive policies. The brilliance of the Piketty/Saez line of work (Diamond's name is often dropped from the shorthand reference) is that it uses empirical methods that are "state of the art" in economics departments, using those results to expose the holes in orthodox economic theory.

But what makes Piketty/Saez especially important is that they reach affirmative conclusions, rather than simply casting doubt on the conventional wisdom. For example, much of my writing is of the variety that says: "Here is how the house of cards that is modern economics was built. There's no there there." If viewed uncharitably, that argument can be mischaracterized as "radical doubt," that is, the claim that we know nothing -- and we never can know anything.

In fact, I (and the many other people who critique orthodox economics) have always gone out of our way to say that we need to use careful empirical work to understand the world. (See, for example, the last two paragraphs of my recent DoL post critiquing behavioral law and economics, here.) The Piketty/Saez line of work delivers. As powerful as it is to say, "The theory and evidence supporting trickle-down economics is bunk," it is even more powerful to say, "The evidence supports a policy agenda for income and wealth redistribution that most Americans would view as extreme (with marginal tax rates on top incomes above 70%), and properly understood economic theory supports that conclusion."

In other words, thanks to the Piketty/Saez line of work, the case for progressive tax and spending policies is not that we cannot believe conservative economists, so we might as well follow our hearts. It is that conservative economists are wrong, and the evidence shows that highly redistributive fiscal policies are both effective and beneficial to the economy. To those who say, "You can't beat somethin' with nothin'," Piketty, Saez, Diamond, and others respond: "Well, here's something!" And it helps that they are right.

10 comments:

Very nice post . . . although I think the argument for lower taxes on capital income is more a case of rationalizing existing preferences than forward-looking argument . . . many conservatives would probably agree with this

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